In Feb 2023 I purchased and moved into a new home and converted my previous home into a rental property. I am itemizing this year, so I am splitting the mortgage interest of the home converted into a rental based on the percentage of when it was used as my primary residence and the percentage it was used as a rental property.
When entering this for my schedule A, do I also need to adjust the outstanding mortgage balance based on the percentage it was used as a primary residence? Or do I include the full mortgage balance shown on my 1098?
I want to make sure I do this right, because when I include the full mortgage balance, it exceeds the 750k IRS limit and I get less of a refund.
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If you enter the 1098 for the Home Mortgage Interest and the home was a personal residence turned rental, you do have the option of entering the 1098 and letting the program make the allocation.
In your situation, I would not do it that way.
I suggest you enter the 1098 for the home and indicate that it was paid off. Next, enter the second 1098 for the new home.
Enter the interest as an expense directly on the Schedule E for the rental.
TurboTax probably won't handle the loan balance the way you want it to if you enter both 1098's in the home mortgage section and not adjust the balance.
Thank you for this feedback. Would I indicate the loan as paid off by entering "0" as the outstanding mortgage principal in box 2 on my schedule A?
I am apprehensive about changing the value of box 2 to "0" since it would not match the value of box 2 on the 1098 that was issued to me (I don't want this to be a flag to the IRS). On the other hand, it doesn't make sense to count the entire box 2 mortgage balance since I didn't live in the house for most of the year after it was converted to a rental.
Or, would entering "0" treat it in a similar way as if it were "sold"? Just want to make sure I am thinking about this all correctly, and that this would not be a flag in the eyes of the IRS.
The purpose of the ending mortgage balance for Box 2 is to calculate the average mortgage balance for the year. Enter whatever is reported on Form 1098 and see if the result is what you expect. Be sure you complete the interview in the mortgage interest section. There may be questions that follow after you enter all 1098's. Or you may see "Needs Review" on the list of 1098's you have entered.
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